The overnight reopening got off to a weak start, not helped by China’s failure to capitulate to speculators drooling over the possibility of a reserve ratio requirement cut. Disappointed market participants quickly hit the sell button, causing a panic in Chinese equities and an elongated move into haven instruments, namely gold and the Swiss franc. Carry-trades including USD/JPY and GBP/JPY witnessed a forceful unwind along with base metals including copper while the energy complex continues to display startling losses with oil pricing at the weakest levels since 2009. The question is whether or not the carnage has been enough to dispel the global growth miracle narrative that has become ubiquitous with financial market success for the last several years. Has the recovery meme finally been refuted as investors scramble for the exits? Or will this merely lead to another round of Central Banks becoming the buyers of last resort as market participants wait on the sidelines for glimmers of hope.
Equities across the globe are feeling the heat as the unwind in China extends to Europe and the United States. The devastation running rampant in stocks has seen valuations crushed with many global benchmarks trending negative year-to-date as concerns about the outlook for corporate earnings nosedive hand in hand with global trade dynamics. Dow futures are trading at levels last seen in 2013, giving up all of 2014’s gains while NASDAQ futures have just been halted after falling over 5%, triggering circuit breakers. Markets are feeling much more panicked as evidenced by the CBOE Volatility Index, commonly referred to as the fear index. Many traders use this product as a means to hedge against perceived or potential future volatility based on prevailing conditions. The sharp rise last week is a strong signal that sentiment is souring. However, panic is also a strong signal for potential opportunity. With valuations for stocks dropping, it might be time to start evaluating instruments with dividend yield as price-to-earnings multiples reconnect with reality. The carnage in markets might prove painful for some, but full of opportunity for those with adequate cash levels to deploy to opportunistic situations.